Slide 1AgendaThe Euro: What is It?Early Thoughts: 19291969: Barre ReportMarch 19791986: Single European ActTreaty on European UnionMaastricht TreatyLaunchInitial GrowthGlobal RecessionSovereign Debt Crisis (PIGS)Future of the EuroQuestions?SourcesThe Euro: It’s History & FutureEric JohnsonAgendaThe Euro: A SummaryHistory LessonSovereign Debt CrisisFuture of the EuroQ & AThe Euro: What is It?Born from the Maastricht TreatySecond most traded currency in the world.23 countries use the currency17 Economic Monetary Union (EMU or “Eurozone”) member states6 non-EU states unofficiallyThe most successful monetary union of modern history (so far)Early Thoughts: 1929 Gustav StresemannChancellor of GermanyLeague of NationsProposed an initiative for economic and monetary unionCommon currencyIdea fell on deaf earsAftermath of WWIRecent failure of the Latin Monetary Union1969: Barre ReportEuropean Commission initiative for greater coordination of economic and monetary policyPierre WernerPrime Minister of LuxembourgTasked with creating a solutionReport published in October 1970: currency band between EEC members“snake in the tunnel”Collapse of the Bretton Woods System in 1971March 1979European Monetary System (EMS)Creation of the European Currency Unit (ECU)An accounting currency for EMS member countriesECU factors in weight of countries’ economic trade and financial sector on the European Economic Community (EEC)For members, exchange rates float within a narrow marginFor non members, exchange rates float freelySetting the stage for the Euro1986: Single European ActPassed by the EECCreation of a single market by 1992 Man in charge: EC President Jacques DelorsDelors Report in 1989Established a three stage program towards achieving this goalFirst stage: Abolishment of exchange controls▪Allow free flow of capitalSecond stage: Creation of the European Monetary Institute▪Later the European Central Bank (ECB)Third stage: LaunchTreaty on European UnionThe Maastricht TreatyFebruary 7, 1992Created the European Union (EU)Goal: Establish a common currency by January 1999Maastricht TreatyFour key requirementsInflation rates be no more than 1.5 times the weighted average of the three best performing nations in the EU.Government Finance: ratio of annual government deficit to GDP must not exceed 3 percent at the end of the preceding fiscal year. Ratio of government debt must not exceed 60 percent from previous fiscal year.Country must adhere to exchange rate mechanism of EMS for two years and not devalue its currencyNominal long-term interest rate must not be more than two percent above the three lowest inflation member countriesLaunchOfficially: January 1, 1999Legacy currencies still acceptedNot minted until January 1, 20027.4 billion notes38.2 billion coinsEuro starter kitsMassive marketing campaignsEducating banks, retailers, and the publicInitial GrowthEarly 2000sSlow startEuro value against the dollar▪Peak at $1.59Growth in the EMU (Eurozone)▪Initially: 11 countries and 3 micro-states▪Today: 17 countries (officially), 6 countries (unofficially)Global Recession2009: founding of the Euro GroupFormalized by Lisbon TreatyFinance Ministers from EMU member statesDiscuss issues pertaining the EuroCurrent President▪Jean-Claude Juncker, Prime Minister of LuxembourgSovereign Debt Crisis (PIGS)Greece BailoutReceived 110 billion Euros from IMFCaused by:▪Large deficit▪Poor economy▪Political corruption▪Misreporting of economic statistics to EUIreland85 billion Euro loanPortugal78 billion Euro loanSpain & ItalyDifficulty controlling deficitsEconomies big enough to damage the EuroFuture of the EuroPossible scenariosGermany opts-out▪Chancellor Merkel fed up with bailouts▪Undisputed powerhouse economy of EUWeaker nation opts-out▪Greece, Ireland, or Portugal▪Political and economic costs too greatSoldier on▪Euro currently trading at $1.41▪Economies of bailed-out countries account for less than 5% of EURock and a hard
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